Compliance & Regulation

Recent comments by a banking regulator about commercial real estate lending are making it tough for builders to get construction financing, according to the National Association of Home Builders. "We have received scores of reports from builders across the nation who have been unable to obtain acquisition, development and construction financing for viable projects or have experienced adverse treatment regarding an outstanding loan," said NAHB president Bob Jones. Due to pressure from regulators, banks are not issuing new AD&D loans and they are calling in existing construction loans to "get them off their books," Jones said. Comptroller of the Currency John Dugan recently called on the regulators to impose hard limits on CRE and construction loans. He stressed, however, that limits should be carefully phased in so problems at distressed banks are not exacerbated. But NAHB contends the comptroller is sending the wrong signal. "With the housing market struggling to regain its footing, regulators need to be issuing more flexible guidelines that will encourage banks to maintain funding for residential AD&C loans in good standing that fall below their underlying value," said Jones.

The Obama administration is funding foreclosure prevention programs in five more states that are suffering from high rates of unemployment and home foreclosures. The five states -- North Carolina, Ohio, Oregon, Rhode Island and South Carolina --will share in $600 million that will be funneled though state housing finance agencies. To gain access to the "Hardest Hit Fund," the housing agencies will have to submit "innovative" plans to the Treasury Department for assisting unemployed homeowners and providing incentives for servicers/investors to modify loans and reduce principal. In the first round, California, Arizona, Florida, Michigan and Nevada were selected as the hardest hit states. Housing finance agencies in those states are in line to share $1.5 billion in funds when Treasury approves their foreclosure prevention plans. "We want to test models that potentially could be used in other states," HUD secretary Shaun Donovan recently told a Senate committee.

Lenders participating in a new Federal Housing Administration refinancing program to help homeowners with underwater mortgages can pool those FHA loans in standard Ginnie Mae mortgage-backed securities. In reducing the principal to a 97.75% loan-to-value ratio, the "FHA Short" refinancings will be treated like standard FHA refinancings and placed in Ginnie Mae I and Ginnie Mae II pools, according to sources. A previous FHA principal reduction program, known as Hope for Homeowners, had more restricted pooling options. Ginnie Mae only allowed pooling of H4H refinanced loans in multiple-issuer MBS. The Obama administration unveiled its new FHA Short Refinancing program last Friday and it requires principal reductions of at least 10%. FHA officials said claim and default rates on these refinancings won't be counted toward the lender's Credit Watch score.

The Treasury Department has increased the incentives for servicers, investors and distressed homeowners to participate in an expedited short sales program that goes into effect April 5. Under the Home Affordable Foreclosure Alternative program, the servicer can receive a $1,500 incentive and the homeowner can receive $3,000 when a short sale or deed-in-lieu transaction is completed. "That $3,000 is going to turn some heads," said Travis Olsen, chief operating officer of Loan Resolution Corp. "That is going to make it truly worthwhile" for the borrower to complete a short sale, he added. LRC specializes in short sales. Last December, Treasury proposed to pay the servicer only $1,000 and the homeowner $1,500 for relocation costs. Treasury also doubled the maximum payoff for subordinate lien holders that relinquish their claims and the reimbursement for first mortgage investors. Now the investor can pay the second lien holder up to 6% of the loan amount with a $6,000 cap and be reimbursed on a one-for-three match for up to $2,000. Originally, Treasury capped reimbursement at $1,000 and the payoff at $3,000. Subordinate liens must be extinguished under HAFA so the property can be sold and the former homeowner can walk away debt free.

The HUD Office of Inspector General has found significant underwriting deficiencies in Federal Housing Administration-insured loans originated by a subsidiary of homebuilder D. R. Horton Inc. The Department of Housing and Urban OIG auditors also discovered that DHI Mortgage placed "unallowable" covenants on FHA loans that restricted the sale or rental of the property for one year. The Fort Worth, Texas, builder strongly disagrees with the auditors' findings and claims the anti-flipping covenants were recorded "without its knowledge or approval." The builder also said the covenants on eight FHA-insured properties were unenforceable and presented no harm to the homebuyer. The OIG auditors reviewed 20 FHA loans at DHI Mortgage and spotted improper calculation of borrowers' income, inadequate documentation of income, inadequate determination of credit and/or debt, and inadequate compensating factors when the debt-to-income ratio exceeded FHA's benchmark ratio. DHI Mortgage strongly disagrees with the OIG findings and filed a 22-page comment letter in response. The HUD IG is recommending that HUD Mortgagee Review Board require DHI Mortgage to indemnify FHA for possible losses of $1.2 million on seven loans and reimburse HUD for $265,000 for losses on three loans. The company had not responded to a request for comment by press time.

Flagstar Bancorp Inc. has priced a public offering of 500 million shares of common stock at $0.50 per share, which is below the stock's 52-week low. Over the past 12 months, the stock hit a low of $0.54 per share on Dec. 16, 2009, according to Yahoo. On March 25, the stock closed at $0.72 per share. But after news that the offering is being priced at $0.50 per share, the next morning Flagstar opened at $0.54 per share. The company will receive total gross proceeds of approximately $250 million. The Troy, Mich., based company expects to close the sale on March 31, 2010. The underwriters will have a 30-day option to purchase up to an additional 75 million shares of common stock at the offering price, less underwriters' discounts and commissions solely to cover over-allotments. The public offering is being underwritten by Sandler O'Neill & Partners, L.P., as book-running manager, and Keefe, Bruyette & Woods, Inc., as co-manager.

Executive of major banks will be testifying before the House Financial Services Committee soon on their efforts to modify and write down second liens. Committee chairman Barney Frank, D-Mass, has summoned Bank of America, Citigroup, JPMorgan Chase and Wells Fargo to testify on April 13. Chairman Frank is concerned that the major banks have become the "principal obstacle" to modifying first mortgages because of their large holdings of second liens and home equity loans. And he has been pressuring the banks to fully participate in the Treasury Department's fledging second lien modification program. "We will be urging the banks to show full cooperation with this plan at a hearing," Rep. Frank said, and "we hope they will be able to explain how they are working with it." The committee chairman also welcomed the Obama administration's new initiatives to assist unemployed homeowners and underwater borrowers. "I was particularly pleased that the administration has adopted the proposal that many of us have been advocating to provide help to the unemployed. While clearly there are some people in trouble on their mortgages who bear some of the responsibility for their plight, this is not true of the unemployed who are fully deserving of this help," Rep. Frank said.

Federal regulators are working on ways to match holders of delinquent and/or modified first mortgages with the holders of seconds in an effort to improve communication between the two parties so they can restructure loans. According to a Comptroller of the Currency/Office of Thrift Supervision report, it is often difficult to obtain good lien information when the firsts and seconds are held by different entities. In a new report, the agencies say, "Initiatives are now under way to make this information more available." Banks and thrifts that provide data for the agencies' "Mortgage Metrics Report" have large second lien portfolios but nearly 90% of the corresponding first mortgages are securitized or held by other investors. OCC and OTS note that banks and thrifts are required to review second liens when the first is delinquent or modified and "hold appropriate loan loss reserves to reflect the elevated risk" of default or loss. Regulators alerted institutions to this long-standing accounting requirement in a December 2009 notice.

California Gov. Arnold Schwarzenegger has signed legislation that re-establishes and extends the state's $10,000 tax credit for homebuyers, a program that proved so popular last year that it ran out of money by the end of June, eight months before it was set to expire. The measure sets a $10,000 credit, up to 5% of the purchase price, for buyers of newly built homes and a similar credit for first-time buyers who purchase existing homes. The credit will be available on "personal residences" purchased between May 1 and Dec. 31, and "principal residences" acquired between Dec. 31 and Aug. 1, 2011, as long as long as they were purchased pursuant to a contract executed on or before Dec. 31. The $200 million allocated for the program, which is offered in addition to the revised and extended federal tax credit, will be split evenly between new homebuyers and buyers of existing houses. The credit comes with two caveats, however: It must be claimed in equal installments over a three-year period, and buyers must live in the homes they buy for two years or forfeit the benefit. Despite the restrictions, both builders and Realtors hailed the measure. "The tax credit will help push prospective buyers off the fence, clear out inventory, and jump start the home building industry, which will help create jobs and reinvigorate the state's economy," said Liz Snow, president of the California Building Industry Association. Nearly 40% of first-timers said they wouldn't have purchased a home if the federal credit to buyers was not offered, according to CAR research conducted last year.

The Federal Housing Administration is taking another crack at creating a refinancing program that requires principal writedowns and gives investors an option to cut their losses on underwater conventional loans. The FHA refinance option requires servicers to write down the principal amount of the mortgage by at least 10% so the loan can be refinanced into a standard, fully underwritten FHA mortgage with a 97.75% loan-to-value ratio. To qualify, the borrower must be current on the existing mortgage and payments on the new FHA-insured mortgage cannot exceed 31% of the borrower's income. If there is a second lien on the property, the refinanced combined LTV cannot exceed 115%. "This refinancing will help homeowners by setting monthly payments at the affordable levels and decreasing the mortgage burden for families owing significantly more than their homes are worth," according to a summary of the new refi program. This new refinancing option will be available in the fall, possibly earlier. For the past two years, FHA has been trying to get a principal writedown program called Hope of Homeowners off the ground without a lot of success. The congressional mandated H4H program has too many restrictions and places too many obligations on the borrowers and investors. The new FHA refinancing program is much simpler and it appears administration officials believe it will be attractive to investors and homeowners. The minimum FICO credit score is 500.